Risk Aversion, Foreign Exchange Speculation and Gambler’s Ruin

John Carlson

Economica, 1998, vol. 65, issue 259, 441-453

Abstract: The apparent persistence of unexploited opportunities for expected profits in foreign exchange markets suggests highly risk‐averse market participants. Financial institutions put tight limits on the foreign‐exchange positions they may have at risk at any time, despite beliefs that the odds are favourable that the positions will be profitable. This ‘safety‐first’ practice is consistent with keeping the probability of ruin low enough to be of no practical concern. The setting of a very low probability of ruin for prudential reasons provides a rationale for traders behaving as if they have a degree of risk aversion that might otherwise seem implausibly high.

Date: 1998
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Working Paper: Risk Aversion, Foreign Exchange Speculation and Gambler's Ruin (1993)
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